September 10, 2010

I recently wrote about how privately held biodiesel producers were going out of business at the same time that government entities were starting biodiesel operations to supply their own needs. I thought it was somewhat troubling to see biodiesel production shifting from private sector to the public sector.

Around that same time, a private company, REG, reopened a 60 million gallon per year plant in Seneca, Illinois that it had recently acquired. It seemed strange that while the biodiesel industry as a whole was having such a difficult time that they were expanding. At the time I figured that they either had very good financing or were working off of cash reserves from better times.

But digging further into this suggests that biodiesel producers in the state of Illinois have fared better than producers in the rest of the country since the biodiesel tax credit expired at the beginning of the year.

The $1-a-gallon biodiesel excise tax enacted four years ago is designed to make biodiesel competitive in the market, said Kevin Lockart, energy management specialist for Tremont-based Ag-Land FS, Inc.

"Illinois probably isn't as affected as other parts of the country because a state tax exemption (on blends with at least 11 percent biodiesel) still provides an advantage," Lockart said.

Nationally, the tax credit is designed to level the playing field when it comes to fuel. The cost of the amount of soybean oil needed to produce a gallon of biodiesel averages about $3 a barrel while only $1.82 worth of crude oil is necessary to produce a gallon of fuel, according to U.S. Department of Energy statistics.

"We're continuing to sell it but (the lack of a tax credit) has shut down just about everybody but the state of Illinois," said Lockart.

"In Illinois, B-11 (a blend of diesel fuel and 11 percent vegetable oil) still has a six-cent advantage over regular diesel fuel. But in a state like Indiana (without the sales tax exemption), it won't sell. John Q. Public wants the best price for fuel," he said. - Journal Star

So thanks to favorable state incentives, the biodiesel industry in Illinois is surviving and at least in the case of REG expanding.

The biodiesel industries in other states have not fared as well.

There are four biodiesel plants in Arkansas, including one in DeWitt, but only the one in Batesville is producing any biofuel. - Dewitt Era Enterprise

Just one biodiesel plant is still running in the state, FutureFuel Corp. in Batesville, which is operating at less than 20 percent of capacity. - Arkansas News

At the national level, the biodiesel industry is struggling as well. And even though REG is expanding in Illinois, they have been forced to scale back operations in other states.

The drop in sales forced REG to lay off nearly half its production staff, including shutting down biodiesel plants at Ralston and Newton.

Roughly half the 50,000 U.S. jobs directly associated in biodiesel production have been lost the past two years. An estimated 2,000 Iowans have been laid off due to the expiration of the biodiesel credits. - Daily Times Herald

The wait for the federal government to reinstate the biodiesel tax credit has left the industry in most states suffering. Illinois on the other hand, had policies in place that have allowed the industry to fare much better than the states around them. Perhaps, this is another area where state governments need to take action where the federal government has failed to.